(Based on the Indian Corporate Governance Scorecard Framework developed by IFC-BSE-IiAS)

The corporate sector has braved another Financial Year amid the COVID-19 pandemic and other economic and political developments continuously evolving and shaping the new world order. The Setting section of the Hub in this month’s edition brings insights from the annual report on Corporate Governance in India, jointly developed by the International Finance Corporation (IFC), Bombay Stock Exchange (BSE) and Institutional Investor Advisory Services India Limited (IiAS).

The report provides findings from an assessment framework which evaluates the corporate governance practices adopted by companies listed at BSE. Since the responses collected in the study are independent of regulatory requirements, it provides a different perspective to the stakeholders that include companies, investors, regulators, lenders, policy makers and others, helping them to gauge the performance of capital markets in the country through the lens of corporate governance. The sample of the study consists of S&P BSE 100 companies for the analysis.

The 2021 report shows that the corporate India have continued to improve governance practices even during the pandemic years. The overall median corporate governance score of sample companies has increased marginally to 62 in 2021 from 61 in 2020 and 58 in 2019. The categorization shows that 20 companies were in the ‘LEADERSHIP’ category, against 11 in 2020 and six in 2019. A total of 57 companies were falling in the ‘LEADERSHIP’ and ‘GOOD’ categories in 2021, against 55 in 2020. Companies in the ‘BASIC’ category increased to 8 in 2021 against 4 in 2020. The sub-categories of the various parameters on which the companies were rated included; Rights and equitable treatment of Shareholders (30% weight), Role of Stakeholders (10% weight), Disclosures and Transparency (30% weight), and Responsibilities of the Board (30% weight).

The study shows that PSUs have underperformed compared to their peers in the overall scorecard. The number of PSUs in BSE 100 index has also decreased from 18 in 2020 to 15 in 2021, a trend consistent over the last 5 years. Among the sectoral categories, the financials, consumer discretionary and industrials sectors have shown an improvement in their governance scores whereas the telecom and utilities industry has shown a decline in median scores. In terms of ownership, promoter-controlled companies account for 66% of the BSE 100 index and have a greater influence in the overall score.

¹The framework is built around the G20/OECD Principles of Corporate Governance

The report also shows that institutional investments in the LEADERSHIP companies tends to be higher than the rest (which means lower promoter shareholding). This allows institutional investors to have a greater say and such companies to have more independent and more diverse boards. Investors play a major role in enhancing the corporate governance practices of companies. Stronger boards have helped companies to imbibe strong governance practices and move ahead despite the challenges posed by COVID-19.

The analysis shows that markets value governance; companies that performed better in governance also performed well in the capital markets over the years (since 2017 when the first edition of the report was published). The findings also show that board effectiveness is the most critical component in the overall governance performance of companies. Among other requirement s, a certain level of independence and diversity is desirable in the boards to carry their responsibilities effectively.

We duly acknowledge Institutional Investor Advisory Services India Limited (IiAS) for this note on their study with the same title.

You can access the original report using the link: Corporate Governance Scores: Immunity through Strong Boards (Report 2021)